Geopolitics of Qatar natural gas in the era of hydrocarbon markets transformation: small state approach

Nikolay Kozhanov

College of Arts and Sciences, Qatar University

The phenomenon of small states and their foreign policy remains insufficiently studied in the modern literature, although researchers have been actively addressing this topic since at least the 1950s. The initial interest in this issue was caused by the collapse of the colonial system and results of the Second World War that led to an increase in the number of small (in terms of territory, population, economy size) states that had limited influence on other players due to limited capacities to mobilize resources of material, diplomatic, regulatory, and legal nature (Almezaini et al. 2017: 11). The attention of researchers to small states was determined by the global confrontation between the USSR and the United States, which required politicians to understand what position with regard to the opposing ideological systems will be taken by different countries, including those that were unable to independently ensure their security and influence the processes going on around them (Walt 1990). By default, the status of a “small state” implied not only inability of a country to pursue completely independent foreign policies but also necessity to build alliances/coalitions to compensate existing limits meaning that, in terms of their behavior and decision-making mechanisms, small states were different from their “big” counterparts. However, during the Cold War times, the most obvious conclusion that their policy is reactive towards the major players finally forced academics to abandon the purposeful study of the small states phenomenon (Walt 1990).

A new surge of interest in small countries took place after the 1990es collapse of the USSR, Yugoslavia, and Czechoslovakia. These political cataclysms not only created new small states, but also forced the existing smaller players to reconsider the system of their coalition relations. A separate reason for the interest in foreign policy issues of small states was created by their increased ability to influence the international environment overcoming the limits naturally imposed by their size (Miller 2020: 124-125). The collapse of the bipolar world led to the emergence of new options to form coalitions or alliances that were deprived of ideological constraints. At the same time, the growing costs of military actions as a foreign policy instrument raised the importance and effectiveness of diplomatic tools that were more accessible for small states, thus, also increasing their weight as international players (Skriba 2014).

Unfortunately, neither before, nor after 1991, the small states of the Persian Gulf attracted the same attention of researchers as the European states or some countries of the former USSR. The number of recently published academic studies focused on the specifics of the Gulf states behavior hardly goes beyond two dozen (among the most significant are: Belfer 2014; Kamrava 2013; Miller 2020; Ulrichsen 2014). Meanwhile, the foreign policy of these countries has their own specifics that allows talking about them as a special variant of a small state. As opposed to other small players, they can pursue a relatively independent and, at the same time, influential foreign policy, avoiding the formation of rigid coalitions and complete neutrality.

Traditionally, it is taken for granted that small states see their highest foreign policy priority in ensuring their own security. Due to limited resource capabilities, it can be achieved through the formation of coalitions by either bandwagoning (when a small state follows an existing regional leader that can also be perceived as a source of threat), or through “balancing”. In the Latter case, a small state forms a coalition with other players and/or interacts with international institutions to limit the influence of a regional leader or a larger rival (thus, balancing the threat coming from it) (Walt 1990; Skriba 2014). Under these circumstances, small states are supposed to be in constant search for a golden mid not only between the policies of balancing and bandwagoning, neutrality and the need to participate in regional alliances, but also between involvement in coalition structures and the degree of autonomy that they would like to maintain by participating in them (Almezaini et al. 2017: 12-13).

However, the small states of the Gulf and, first of all, Qatar adhere to a slightly different strategy that Almezaini and Rickli call the “hedging” behavior. It is adopted by a small state simultaneously dealing with many challenges and living in the environment that implies the high degree of uncertainty (Almezaini et al. 2017: 15-16). This strategy includes simultaneous formation of multi-level and multi-format coalitions that balance each other and allow a country to be ready to respond to almost any challenge, although such approach is believed to be more complicated and expensive for a small state. When applying the “hedging” policy, a small state can, for example, establish bandwagoning relations with a leading regional player and, at the same time, deter its influence by the formation of `balancing' coalitions at the international level. This allows a small state to maintain a higher degree of autonomy and even to enter into occasional limited confrontation with partners in different coalitions/alliances if necessary (Almezaini et al. 2017: 15-16). Thus, currently, Doha compensates for its close contacts with Iran through a partial restoration of relations with Saudi Arabia and the UAE, Tehran's natural rivals. At the same time, Qatar's close alliance with Turkey makes it possible to confront Riyadh and Abu Dhabi on several occasions in the Middle East. On the other hand, Doha's close political relations with the United States are, to some extent, balanced by trade and economic ties with Japan, China, and India, as well as cautious flirtation with Russia. In addition to that, Qatar tries not conduct a reactive foreign policy but also to influence the international situation. Doha clearly has long-term diplomatic plans, and it does not focus on close cooperation with its immediate neighborhood which, according to Miller, is unusual for small states (Miller 2005: 241).

Qatar's deviation from the standards of the small state behavior is explained by its control over significant gas resources and ability to ensure their sustainable exports to external markets (BP 2020: 12, 90). By 2020, Qatar annually received $45 billion from the exports of natural gas (61% of the country's total exports). During 2016 - 2019, the export of hydrocarbons (including oil) provided up to 55% of annual state revenues. Together with the dividends received by the government from Qatar Petroleum, this figure can reach up to 82% (Ingram et al. January 2020; Planning and Statistics Authority of Qatar 2019). Significant financial revenues from the export of natural gas and a small number of indigenous populations with whom the ruling elite needs to share the income from the export of hydrocarbons allow the country's leadership to accumulate the substantial amount of free funds necessary for the implementation of a rather costly and expensive “hedging” policy that differs the Emirate from other “small states” (Miller 2020). Under these circumstances, Doha's desire for dominance in the LNG markets is defined by three national goals:

The roots of the above-mentioned transformations that began in the Late 2000s and affected global markets by the mid-2010s are Linked to two factors: the US shale revolution and the beginning of the global energy transition to non-carbon fuels. Thanks to the shale revolution, the United States not only became the Largest producer and exporter of hydrocarbons, but also stimulated the emergence of new players. In addition, the booming American LNG industry, fueled by shale gas, has prompted even conventional producers, such as Russia, to increase their LNG production capacity. This inevitabLy Led to an oversuppLy in the market and increased competition between key pLayers.

The threats posed by the transformation of the gas market to Qatari economic and political interests could not but provoke a response. Doha's response to the existing challenges was to choose a market strategy based on the principle of accelerated monetization of available natural resources to invest received revenues in the diversification of its own economy. On 24 May 2020 Qatar Petroleum chief executive, Saad al-Kaabi, stated that his country not only does not intend to reduce gas exports to the market in order to maintain high prices for liquefied gas, but also considers it necessary to significantly increase production capacity, even if this will Lead to a further glut of the market. Al-Kaabi based his claim on the fact that Doha is the most cost- effective gas producer in the world and therefore can cope with market shocks. He also added that many manufacturers will have to curtail production due to low prices, but for Qatar such a scenario is excluded (Podymov 2020).

In other words, Doha declared its readiness to wage a price war against its opponents. Qatar has been preparing for this scenario for a long time. In 2017, the country lifted a moratorium on further development of the Northern Dome gas field, and since then it has been constantly reviewing its development plans in the direction of further increasing production (GIIGNL 2017; GIIGNL 2018). It was originally planned to increase the liquefaction capacity from 77 million tons per year to 100 million tons per year, but this figure was increased to 126 by 2021. However, this approach contradicts the behavior of small states aimed at forming coalitions or pursuing neutrality, rather than going into confrontation without allies. Nevertheless, the choice in favor of a price war did not have an alternative.

Qatar could not affect prices through decrease in its own output only: considering the overall level of LNG production in the world and volumes of pipeline gas exports by other players Doha would only voluntarily give up its market share in favor of other players (Mosis 2020). The problem could be solved by uniting the largest gas producers within an OPEC-type cartel that could make binding decisions to regulate production and remove surpluses from the market. And, formally, such a scenario would be more logical for a small state that seeks to ensure its interests by forming coalitions. However, although a number of analysts periodically suggest turning the already functioning Gas Exporting Countries Forum (GECF) hosted in Doha into a market-regulating structure, the emergence of such an organization in the foreseeable future is unlikely. First, there is still not a united global gas market that is necessary for the functioning of a gas cartel. Second, due to national legislation in a number of countries and, above all, in the United States (that are not included in the GECF, as well), it is very difficult to force local producers to reduce production by government decisions. Third, Doha considers the traditionally negative reaction of Western countries (and consumers in principle) to the cartelization of energy production and, therefore, does not want to spoil relations with them by creating a gas OPEC (Cohrane 2020).

Under these circumstances, the maximization of the market share (and, in fact, a price war with rivals) turned out to be the only suitable strategy for Qatar. However, this approach is inevitably associated with a few costs that the need to conduct a confrontational policy towards Qatar market competitors may bring. And this is where the strategy of "hedging" through the creation of multi-level coalitions may help Qatar to mitigate negative consequences of its choice by forming flexible alliances with both producers and consumers of natural gas.

First of all, Doha is focused on strengthening relations with current and potential consumers as the question of who is going to buy additional volumes of LNG that Qatar is set to produce by 2026 remains open (Cohrane 2020; Mosis 2020). This forces Doha to be more flexible about the terms of future long-term contracts when they are negotiated with customers. Qatar Petroleum is also developing its capacities to quickly react to price fluctuation by being able to change the direction of LNG exports towards more profitable spot and short-term markets (Cohrane 2020; Mosis 2020). Thus, by 2021, Qatar already demonstrated exceptional flexibility in the geography of supply. During the first half of 2020, the decline in the volumes of Qatar's LNG exports to Asia (Doha's customers began to buy only the minimum required volumes of gas declared in their long-term contracts with Qatar, both due to lower domestic consumption and partial reorientation to cheaper spot markets) led to an increase in the volume of LNG exported by Qatar to Europe. In the winter of 2020 - 2021, rising demand and prices for LNG in Asia, on the contrary, forced Doha to increase its supplies to the Asian market. To be ready to respond to changes in regional price trends and gas consumption by moving its gas supplies from one region to another, Qatar is strengthening one of the most important tools of its gas empire - the LNG fleet. Doha plans to receive at least 60 large modern gas carriers built in the shipyards of South Korea and China. At the same time, by placing this order, the Qatari authorities also ensured that a huge amount of shipbuilders' production capacity was loaded, preventing Doha's competitors from using it.

However, Doha's main bet in its battle for gas markets is still put on the expansion of its list of long-term contacts (even if they signed on less favorable terms than before). Through active diplomatic contacts, Qatar continues convincing both the leading Asian countries (such as Japan, South Korea, and China) and growing economies of the Asian region of the need to conclude long-term contracts for LNG supplies from Qatar. In 2021, these efforts already led to the signing of new contracts with Bangladesh and Pakistan. In 2018 - 2020, Doha's active contacts with its trading main partners showed that Asian countries remain the priority direction of gas exports by Qatar (GIIGNL 2018; GIIGNL 2019; GIIGNL 2020). The latter is not surprising: in the coming years, it is the Asian countries that will remain the main consumer of natural gas, responsible for the lion share of demand growth. The only difference from the previous decades will be that the growth in consumption volumes in Asia will be largely secured not by the East Asian economic leaders, but by the developing economies of Southeast Asia (Fulwood et al. 2020; Gulf Times 2019).

Interaction with its direct competitors also remains the important part of Qatar's market strategy, and it is largely determined by Qatar's status as a small state. On the one hand, the leadership of the country indicated its readiness to enter into a price war with both competitors in the LNG market and those players who prefer to export pipeline gas. However, it is intended to fight only in case of extreme need and due to economic considerations. For example, in the first half of 2020, Qatar increased its LNG exports to Europe. Subsequently, Doha was not only able to strengthen its position there, but also challenged the interests of Russian Gazprom and Algerian producers. By entering into competition for the European market, Doha enjoys advantages provided by the political situation and, above all, the EU's desire to diversify its dependence on Russian gas supplies, thus forming, in general, an anti-Russian coalition and partly following the balancing strategy (countering Russia-its economic rival at gas markets-through the formation of a coalition with Moscow's opponents). For example, Russia's negative image in Europe was the reason for Poland to become a customer of Qatar (by 2020, Qatar became the main and Largest supplier of Liquefied gas to the country). After 2021, the Qataris will further strengthen their presence in the Eastern European market by supplying LNG to Croatia and Hungary through the LNG terminal on the Croatian island of Krk. In the future, Doha plans to increase supplies through the Krk to one billion cubic meters (GIIGNL 2021).

On the other hand, readiness for confrontation is only one element of the Qatari strategy. Qatar, as a small country, still prefers forming alliances that are not targeted against anyone. Unlike Saudi Arabia or Iran, Qatar has never considered its natural gas as a weapon of political pressure, although for example, the Russian side periodically suspected Doha of trying to oust Gazprom from the European gas market due to non-economic reasons. In different years, Russian pro-government analysts and even politicians argued that by competing with Russia's natural gas producers for the EU market Qatar was either avenging Moscow for some of its moves in the Middle East (for instance, for Russia's decision to support Assad in the ongoing Syrian civil war) or fulfilling some obligations to the US whose leadership asked Doha's help in undermining the economic potential of Putin's Russia. In reality, whenever Qatar participated in price wars for external markets, including, for example, its active struggle for the European market share in 2009 - 2012 or 2020, its motives were explained primarily by economic reasons (Wan 2011; Orlova 2019: 216 - 217). In its political diplomacy, Doha saw its natural gas supplies as a means to build alliances and binding other players to itself, rather than a means of pressure.

Doha also tries to “buy competitors” through active foreign investment in oil, gas, and petrochemical industries of its rivals, including but not limited to the US shale industry. Since the mid-2010s, Qatar has been actively expanding its presence in the oil and gas sector of Africa, Latin America, Asia, the EU, Russia, and the United States. The logic of the Qatari leadership is quite simple. By investing in various hydrocarbon producers, including its direct competitors, Qatar, on the one hand, hedges risks by gaining access to alternative sources of income, and, on the other hand, makes its competitors less interested in confrontation and more motivated to interact (al-Tamimi 2015).

To ensure its ability to pursue the policy of risk hedging that is expensive and not quite standard for a small state, Qatar has been actively and successfully strengthening its presence in the regional natural gas markets over the past twenty years. At the same time, the beginning of the era of relatively low hydrocarbon prices, frequent oil price fluctuations, limited potential for global growth in oil and gas demand as well as intensification of international competition for gas consumer markets threatened the sustainability of the main source of financing for the current Qatari foreign policy model- LNG exports. However, the same strategy of risk hedging allowed Doha to develop some elements of its response measures set. Thus, even under increased market competition and being prepared to wage a price war, Qatar is actively trying to form alliances that minimize potential risks by building, as far as possible, close contacts with both consumers and exporters of natural gas. Unlike some of its Gulf neighbors, Qatar hardly sees its hydrocarbon riches as a weapon of political blackmail or aggressive pressure. Even his "checkbook diplomacy" was and still is aimed more at creating favorable conditions for the existence of Qatar in the international arena, rather than at aggravating the stance of its opponents. Whenever Doha was engaged in price wars for foreign markets, including, for example, an active struggle for European market share, its goals were primarily economic, although the political situation could be used to achieve them.

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